Practice Management – ATO bears down on self employed advisers

Continuing Tax Office crack-downs on self employed and sub contractors will have a marked impact on self employed service providers such as financial planners this financial year, warns Tony Fittler.

Financial planners who have their own business structure, but then trade through the auspices of an umbrella group, might find that the Tax Office considers them to be employees of that group.

Legislation was passed in June which means that a number of business may find that their approach no longer satisfies the Tax Office. Broadly speaking you will now need to show that you are carrying on what is categorised as Personal Services Business (PSB).

To satisfy the PSB requirement, at least one of three tests must be satisfied.

Unrelated clients

This is where an individual or business entity gains, or produces, income from providing two or more entities that are not associated with each other with services, and the services provided are as a direct result of making offers or invitations to the public or a section of the public.

Financial planners who service a range of clients but receive all their income through an umbrella group may not satisfy this test. It will depend on how the relationship is structured.

Employment test

Satisfying the employment test will be straightforward for most financial planners, but they would need to check, particularly if they employed family members.

The criteria are:

Engages one or more entities or individuals to perform principal work. These entities or individuals together must perform at least 20% of the individual's principal work, or

For 50% of the year the entity employs an apprentice.

Employment of a para planner and/or another planner would probably satisfy this requirement overall. The "principal work" referred to here does not mean the same as a financial planning principal.

Business premises test

It is possible some planners could fall foul of this where they work from an adviser group's office.

The criteria are that the individual or entity:

Must have exclusive use of the premises.

Must be physically separate from any private premises, and from the premises of any entity to which personal services are provided (ie not the client's office).

The arrangements made by some financial planners could well fail all these tests, although only one of the three tests has to be satisfied.

In addition financial planners who derive 80% or more of their income from one source will need to get a determination from the Tax Office as to whether they are carrying on a PBS. In making the determination, the Tax Office will only use the unrelated clients' test in unusual circumstances.

Failure to satisfy the Tax Office that you are carrying on a personal services business will have a severe affect on any tax arrangements made.

For example, if a financial planner who operates through a family company fails to satisfy the PSB arrangements, income will be treated as the income of the individual rather than the interposed company.

Any deductions available will then be limited in the same way as if the income was earned by the employee. This means, that if a spouse was employed by the financial planner, no deduction for his or her wages could be claimed.

If the PSB rules are not satisfied, no deduction will be available for a business office from your home; family members cannot be engaged in the business on a salary or fee basis unless they engage in the principal work of the entity; and only one motor vehicle may be claimed where there is private use of the vehicle.

This has the possibility of upsetting all the tax arrangements made by a self employed financial planner and any benefits that they may have expected in setting up a business structure.

Any financial planner who feels he or she may be affected should take urgent advice from their accountant to ensure that they comply and are treated as a PSB, otherwise they will need to look at other business arrangements.

Entities that fail the PBS test will have to remit tax on personal services income on a quarterly basis, unless all the personal services income is paid as salary.

These quarterly payments will start on 21 October, 2000 as part of the new tax system.

<I>Tony Fittler is a tax partner with accountants HLB Mann Judd Sydney.